A downtrend in the market can be a good time to buy an asset, but traders are frequently confronted by uncertainty over whether the market will continue its selling momentum and exactly where it will bottom out. In this moment of doubt, the morning star pattern can offer a clear cut signal that a bullish reversal lies immediately ahead.
The "morning star" is the name for an easily recognisable bullish pattern in candlestick charts that appears at the end of a price downtrend signaling the beginnings of a move upward. Like its counterpart, the evening star, the morning star pattern will appear as a cross-like star formation at the finalisation of a price trend ahead of a reversal. It can be useful for identifying a buying opportunity, or for helping traders prepare for later buying opportunities as a new bullish trend picks up steam.
Candle Formation Basics
To identify a morning star on a chart, it's important to recall the basics of candlesticks and pay attention to the formation of the candle body and two wicks. Remember that when the asset value is rising, the bottom of the candle body will represent the opening price and the top will represent the closing price. When the value is declining, the top of the candle represents the opening and the bottom represents the closing.
The wicks, or "shadows," indicate the highs and lows of price action during the period represented by the candles. Further, the candles are usually color-coded, with red signaling a decline in price and blue or green signaling a rise.
Spotting The Morning Star
Learning to interpret candlesticks is useful because they can help traders understand where the market is going next.
To detect the morning star pattern, traders will want to focus on the three candlesticks formed at the bottom of a trend. When the pattern appears, the first candlestick will be a bearish signal, where the open is higher than the close.
The second candlestick will be lower, but this time in a cross-like, or near-cross like, formation; this candle is the bullish morning star signaling a coming upturn. The flat body of the middle morning star showing a closing price near the open is understood as a sign that the market has lost conviction in the continuation of the downward price trend.
The third candle in the pattern is a confirmation candle that comes after the appearance of the morning star. The open of this candle will normally be aligned with the close of the star candle, but its body will extend upward beyond the body of the star.
Upon the appearance of the full morning star formation represented by the three candles, traders will have a firm confirmation that the market is in a reversal toward a move upward. A vertical gap between the bodies of the stars in the formation is considered to emphasize the strength of the reversal signal.
How To Trade When Morning Star Appears
When the morning star pattern appears, traders can use it as a signal to put in an early buy order. In periods of uncertainty, such as preceding a data or news release, the appearance of the star will serve as early confirmation that the market lacks conviction to continue its path downward.
However, traders may want also want to wait and use the star as a signal for entry into the market buying on a subsequent move upward. This is because the initial reversal can often be followed by a steep breakout upward to a higher trading range.
Looking for a morning star pattern on a candlestick chart is a convenient way to spot an upward reversal and a subsequent bullish trend that won't require a complex set of technical indicators. It is important, however, to first practice interpreting candlestick patterns in order to understand the movements that are appearing on the chart. Upon gaining confidence in reading candlesticks, traders can begin analysing downward trends on charts to find the star that will act as a signal to go long for a profitable move upward.
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Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…